01—Abstract
Summary
Summary of the 8-K filed January 27, 2022. Cited figures are marked; the original filing is the authoritative source.
Canadian Pacific Railway (CP) reported fourth-quarter 2021 results on January 27, 2022, with revenues up 1% to C$2.04 billiona, but reported operating ratio deteriorated 530 basis points to 59.2% (adjusted OR 57.5%) and diluted EPS fell to C$0.74 from C$1.19.
The decline was driven largely by higher fuel costs (fuel expense up 37% on a 59% increase in average fuel price), a 45% jump in purchased services and other (including acquisition-related costs), and lower volumes, with total RTMs down 11% in the quarter. For the full year, revenues grew 4% to C$8.0 billionb and adjusted diluted EPS rose to C$3.76 from C$3.53, while reported diluted EPS reached C$4.18, helped by an C$845 million merger termination fee received from Kansas City Southern. The most consequential development is the December 14, 2021 closing of the Kansas City Southern (KCS) acquisition, which was placed into a voting trust pending Surface Transportation Board approval.
Because control has not yet been obtained, CP accounts for KCS under the equity method, carrying a C$42.3 billionc investment on its balance sheet, and recorded a C$7.2 billion deferred tax liability on the outside basis difference. Financing the roughly C$10.5 billion cash consideration pushed long-term debt (including current maturities) to C$20.1 billion from C$9.8 billion a year earlier, and the adjusted net debt to adjusted EBITDA ratio rose to 4.8x from 2.5x. Management's outlook emphasizes the prospect of a single-line network linking the U.S., Mexico and Canada, though the ultimate timing and outcome depend on regulatory approval.
For investors, the quarter shows near-term margin pressure and a much more leveraged balance sheet, while the investment case hinges on successful KCS integration and regulatory approval. Free cash flow for the full year was C$1.79 billiond, up from C$1.16 billion, and the company maintained its dividend at C$0.19 per quarter, but the stock's trajectory will depend heavily on how quickly the KCS deal is approved and synergies are realized.
02—Key points
Key Highlights
- Q4 2021 revenues rose 1% to C$2.04 billion, but reported operating ratio worsened 530 bps to 59.2% (adjusted OR 57.5%, up 360 bps), reflecting fuel cost inflation and acquisition-related expenses.
- Diluted EPS fell to C$0.74 from C$1.19 in Q4 2020; adjusted diluted EPS declined to C$0.95 from C$1.01.
- Full-year 2021 adjusted diluted EPS grew to C$3.76 from C$3.53, while reported diluted EPS rose to C$4.18 from C$3.59, aided by an C$845 million merger termination fee from KCS.
- KCS acquisition closed December 14, 2021 (into a voting trust) for roughly C$36 billion, with 262.6 million shares issued and ~C$10.5 billion in cash paid; CP holds a C$42.3 billion equity-method investment pending STB approval.
- Long-term debt including current maturities increased to C$20.1 billion from C$9.8 billion, and the adjusted net debt to adjusted EBITDA ratio rose to 4.8x from 2.5x.
- Freight volumes weakened in Q4, with total carloads down 10% and RTMs down 11%, led by grain (-21% RTMs) and coal (-27% RTMs), partially offset by freight revenue per carload up 12%.
- Full-year free cash flow reached C$1.79 billion (vs. C$1.16 billion in 2020), and the quarterly dividend was held at C$0.19 per share, with a 2021 full-year dividend payout ratio of 18.2% on reported EPS.
03—Questions
Frequently Asked Questions
Why did CP's operating ratio deteriorate so sharply in Q4 2021?
The reported OR rose 530 basis points to 59.2%. About 360 bps of the increase reflects underlying cost pressure, notably fuel expense up 37% on a 59% rise in average fuel price, and purchased services and other up 45%. The remaining ~170 bps reflects C$36 million of KCS acquisition-related costs included in operating expenses. Lower volumes (RTMs down 11%) also hurt operating leverage.
Does CP currently control Kansas City Southern, and how is the investment accounted for?
No. KCS closed into a voting trust on December 14, 2021, and CP does not yet have control pending Surface Transportation Board approval. Until then, CP accounts for its investment under the equity method, carrying it at C$42.3 billion, which includes a C$7.2 billion deferred tax liability on the outside basis difference. Once control is obtained, CP expects to use acquisition accounting as a business combination.
How did CP finance the KCS cash consideration, and what does it mean for leverage?
CP issued about C$10.7 billion of long-term debt in Q4 2021 across multiple tranches (Notes maturing 2023 to 2051), and settled related hedges for a C$226 million net payment. Long-term debt including current maturities rose to C$20.1 billion, and the adjusted net debt to adjusted EBITDA ratio climbed to 4.8x from 2.5x. Investors should weigh this higher leverage against the expected synergies and the timing of regulatory approval.
Why do reported and adjusted EPS differ, and which is more meaningful?
Reported diluted EPS for 2021 was C$4.18, but adjusted diluted EPS was C$3.76. The difference mainly reflects the C$845 million KCS merger termination fee (boosting reported results by about C$1.24 per share) and a C$33 million deferred tax recovery, offset by C$599 million of acquisition-related costs (about C$0.88 per share). CP uses adjusted measures to assess underlying performance; these are non-GAAP and not standardized, so investors should review the reconciliations provided.
04—Continue